Korea Stock Exchange, Video Net Present Value (NPV) / MBA Resources

Introduction to Net Present Value (NPV) - What is Net Present Value (NPV) ? How it impacts financial decisions regarding project management?

NPV solution for Korea Stock Exchange, Video case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Korea Stock Exchange, Video case study is a Harvard Business School (HBR) case study written by Tarun Khanna. The Korea Stock Exchange, Video (referred as “Kie Korea” from here on) case study provides evaluation & decision scenario in field of Finance & Accounting. It also touches upon business topics such as - Value proposition, Emerging markets, Financial markets, Government, Reorganization.

The net present value (NPV) of an investment proposal is the present value of the proposal’s net cash flows less the proposal’s initial cash outflow. If a project’s NPV is greater than or equal to zero, the project should be accepted.

NPV = Present Value of Future Cash Flows LESS Project’s Initial Investment

Case Description of Korea Stock Exchange, Video Case Study

Features a presentation by In-Kie Hong of Korea Stock Exchange discussing the depth of the crisis, its origin, and its possible resolution in the end. In-Kie Hong addresses a class of MBA students at the Harvard Business School.

Case Authors : Tarun Khanna

Topic : Finance & Accounting

Related Areas : Emerging markets, Financial markets, Government, Reorganization

Calculating Net Present Value (NPV) at 6% for Korea Stock Exchange, Video Case Study

Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Cash Flows
Year 0 (10026220) -10026220 - -
Year 1 3456107 -6570113 3456107 0.9434 3260478
Year 2 3977504 -2592609 7433611 0.89 3539964
Year 3 3973536 1380927 11407147 0.8396 3336257
Year 4 3230772 4611699 14637919 0.7921 2559074
TOTAL 14637919 12695774

The Net Present Value at 6% discount rate is 2669554

In isolation the NPV number doesn't mean much but put in right context then it is one of the best method to evaluate project returns. In this article we will cover -

Different methods of capital budgeting

What is NPV & Formula of NPV,
How it is calculated,
How to use NPV number for project evaluation, and
Scenario Planning given risks and management priorities.

Capital Budgeting Approaches

Methods of Capital Budgeting

There are four types of capital budgeting techniques that are widely used in the corporate world –

1. Payback Period
2. Profitability Index
3. Internal Rate of Return
4. Net Present Value

Apart from the Payback period method which is an additive method, rest of the methods are based on Discounted Cash Flow technique. Even though cash flow can be calculated based on the nature of the project, for the simplicity of the article we are assuming that all the expected cash flows are realized at the end of the year.

Discounted Cash Flow approaches provide a more objective basis for evaluating and selecting investment projects. They take into consideration both –

1. Timing of the expected cash flows – stockholders of Kie Korea have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.
2. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Kie Korea shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.

Formula and Steps to Calculate Net Present Value (NPV) of Korea Stock Exchange, Video

NPV = Net Cash In Flowt1 / (1+r)t1 + Net Cash In Flowt2 / (1+r)t2 + … Net Cash In Flowtn / (1+r)tn
Less Net Cash Out Flowt0 / (1+r)t0

Where t = time period, in this case year 1, year 2 and so on.
r = discount rate or return that could be earned using other safe proposition such as fixed deposit or treasury bond rate. Net Cash In Flow – What the firm will get each year.
Net Cash Out Flow – What the firm needs to invest initially in the project.

Step 1 – Understand the nature of the project and calculate cash flow for each year.
Step 2 – Discount those cash flow based on the discount rate.
Step 3 – Add all the discounted cash flow.
Step 4 – Selection of the project

Why Finance & Accounting Managers need to know Financial Tools such as Net Present Value (NPV)?

In our daily workplace we often come across people and colleagues who are just focused on their core competency and targets they have to deliver. For example marketing managers at Kie Korea often design programs whose objective is to drive brand awareness and customer reach. But how that 30 point increase in brand awareness or 10 point increase in customer touch points will result into shareholders’ value is not specified.

To overcome such scenarios managers at Kie Korea needs to not only know the financial aspect of project management but also needs to have tools to integrate them into part of the project development and monitoring plan.

Calculating Net Present Value (NPV) at 15%

After working through various assumptions we reached a conclusion that risk is far higher than 6%. In a reasonably stable industry with weak competition - 15% discount rate can be a good benchmark.

Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 15 %
Cash Flows
Year 0 (10026220) -10026220 - -
Year 1 3456107 -6570113 3456107 0.8696 3005310
Year 2 3977504 -2592609 7433611 0.7561 3007564
Year 3 3973536 1380927 11407147 0.6575 2612664
Year 4 3230772 4611699 14637919 0.5718 1847204
TOTAL 10472744

The Net NPV after 4 years is 446524

(10472744 - 10026220 )

Calculating Net Present Value (NPV) at 20%

If the risk component is high in the industry then we should go for a higher hurdle rate / discount rate of 20%.

Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 20 %
Cash Flows
Year 0 (10026220) -10026220 - -
Year 1 3456107 -6570113 3456107 0.8333 2880089
Year 2 3977504 -2592609 7433611 0.6944 2762156
Year 3 3973536 1380927 11407147 0.5787 2299500
Year 4 3230772 4611699 14637919 0.4823 1558050
TOTAL 9499794

The Net NPV after 4 years is -526426

At 20% discount rate the NPV is negative (9499794 - 10026220 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Kie Korea to discount cash flow at lower discount rates such as 15%.

Acceptance Criteria of a Project based on NPV

Simplest Approach – If the investment project of Kie Korea has a NPV value higher than Zero then finance managers at Kie Korea can ACCEPT the project, otherwise they can reject the project. This means that project will deliver higher returns over the period of time than any alternate investment strategy.

In theory if the required rate of return or discount rate is chosen correctly by finance managers at Kie Korea, then the stock price of the Kie Korea should change by same amount of the NPV. In real world we know that share price also reflects various other factors that can be related to both macro and micro environment.

In the same vein – accepting the project with zero NPV should result in stagnant share price. Finance managers use discount rates as a measure of risk components in the project execution process.

Sensitivity Analysis

Project selection is often a far more complex decision than just choosing it based on the NPV number. Finance managers at Kie Korea should conduct a sensitivity analysis to better understand not only the inherent risk of the projects but also how those risks can be either factored in or mitigated during the project execution. Sensitivity analysis helps in –

Understanding of risks involved in the project.

What are the uncertainties surrounding the project Initial Cash Outlay (ICO’s). ICO’s often have several different components such as land, machinery, building, and other equipment.

What can impact the cash flow of the project.

What will be a multi year spillover effect of various taxation regulations.

What are the key aspects of the projects that need to be monitored, refined, and retuned for continuous delivery of projected cash flows.

Some of the assumptions while using the Discounted Cash Flow Methods –

Projects are assumed to be Mutually Exclusive – This is seldom the came in modern day giant organizations where projects are often inter-related and rejecting a project solely based on NPV can result in sunk cost from a related project.

Independent projects have independent cash flows – As explained in the marketing project – though the project may look independent but in reality it is not as the brand awareness project can be closely associated with the spending on sales promotions and product specific advertising.

Negotiation Strategy of Korea Stock Exchange, Video

References & Further Readings

Tarun Khanna (2018), "Korea Stock Exchange, Video Harvard Business Review Case Study. Published by HBR Publications.

Arion Entertainment SWOT Analysis / TOWS Matrix

Services , Printing & Publishing

BroadVision SWOT Analysis / TOWS Matrix

Technology , Software & Programming

Tandem Diabetes Care SWOT Analysis / TOWS Matrix

Healthcare , Medical Equipment & Supplies

Cenit SWOT Analysis / TOWS Matrix

Capital Goods , Construction - Raw Materials

Kraton SWOT Analysis / TOWS Matrix

Basic Materials , Chemicals - Plastics & Rubber

Ensogo SWOT Analysis / TOWS Matrix

Services , Retail (Catalog & Mail Order)

Renold SWOT Analysis / TOWS Matrix

Capital Goods , Misc. Capital Goods

Exel Industries SWOT Analysis / TOWS Matrix

Capital Goods , Misc. Capital Goods